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BoE Sees Higher Inflation, Interest Rates in 2017

A rise in inflation next year is likely to strain the spending power of households.A rise in inflation next year is likely to strain the spending power of households.

Britons expect a sharp rise in inflation over the coming year following the plummet in the value of sterling after Britain’s vote to leave the European Union, and more now believe a hike in interest rates is on the way, a Bank of England survey showed.

The survey published on Friday showed average public inflation expectations over the next 12 months rose to 2.8% in November from 2.2% in the previous survey in August, investing.com reported.

Taking a five-year view, Britons expected inflation of 3.1%, slightly higher than the 3% forecast of three months earlier. Some 41% of respondents in the survey expected interest rates to rise over the next 12 months, compared with 21% in August.

The Bank of England and many private economists have said inflation is set to climb sharply in 2017.

After the EU referendum in June, sterling fell as much as 20% against the US dollar but has recovered slightly to be down around 16%.

So far, the British economy has largely weathered the initial Brexit shock better than many expected. But a rise in inflation next year is likely to strain the spending power of households who have driven the recovery in the economy since the financial crisis of 2007-09.

Britain’s inflation rate in the 12 months to October stood at 0.9% and the Bank has previously said it expects it to peak at 2.8% in early 2018. Bank of England Governor Mark Carney has said the BoE is prepared to let inflation run above its 2% target in 2017 but there were limits to tolerating the overshoot.

Meanwhile, businesses in Britain’s services sector grew at their fastest pace since January last month, a survey showed last week, and the broader economy kept up its momentum in late 2016.

The Markit/CIPS services purchasing managers’ index—a closely watched gauge of the services sector—rose to 55.2 in November from 54.5 in October, beating all the forecasts in a Reuters poll of economists.

Despite a dip in the equivalent survey of manufacturers published last week, overall the November PMIs suggest the economy as a whole will maintain the third quarter’s solid 0.5% growth rate through to the end of the year, Markit said.

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